If an individual wants to insure a property, he/she must have an insurable interest in the property; i.e. loss or damage to the property should affect the person financially.
Marine insurance is based on the insurable interest in the property. Although it is important to note that it is not essential for the insured to have an insurable interest at the time of effecting the insurance. Instead, he/she should have such an interest in due course of time. Otherwise, he will not become entitled to indemnification.
It is of utmost importance for insurable interest to be present at the time of loss.
There are three variants of insurable interest in marine insurance policy:
- In the case of ships: The owner of the ship or any individual who has purchased the ship on a charter basis can insure the ship to its total value.
- In the case of cargo: The owner of the shipment can buy marine cargo policy up to the full value of the consignment. If he has already paid the freight, he can take a policy for the value of goods plus the amount of freight.
- In the case of store keeping goods in transit under custody or the owner of the asset transferring it to another place: Any liability towards the loss of goods can be covered but policy is non transferable.
Therefore, insurable interest is one of the fundamental conditions and is legally binding for the Marine Policy to be valid. It needs to be:
- Definite: No ambiguity whatsoever
- Valuable: An estimated value should be attached to it
- Legally Binding: The policy should be legally valid
- Legal Liability: Should involve some kind of a legal liability
Rules For the Use of Insurable Interest
For an insured to be compensated by the insurer, insurable interest should exist-
- At the time of proposing insurance
- Before the loss
- The quantum of insurable interest is significant.
Note that insurable interest cannot exist after the loss, and to be insurable the quantum of interest should be significant enough to require insurance (basic principle of Risk Transfer)
Assignment of the Insurable Interest
Marine cargo insurance policies are freely assignable, however, the insured can assign only his/her own insurable interest in the cargo and not the entire interest covered by the policy, if it’s a joint policy (e.g. between insured and financier etc.).
Same applies to marine hull policies as well.
Case on Insurable Interest
TNY is a merchandise company that exports luxury goods worth millions of dollars every year via sea-route for its buyers in Europe.
Most of the consignments are CIF (cost, insurance & freight) and TNY bears all the expenses till the goods reach the buyer. However, some consignments are FOB where the buyer pays insurance expenses (usually a trader who’ll sell the goods further).
Till the time the goods or merchandise safely reaches the buyer, the insurable interest lies with the merchandise company TNY. However, once the buyers receive the good, the insurable interest is transferred to the buyer.
The transfer of insurable interest takes place once TNY receives a confirmation from the buyer that the goods have been received and in pristine condition. Any damage afterward can be claimed by the buyer from the insurer (if insured afterward).
Case of Shared Interests and Assignment
Cochin Shipping Co. Ltd. owns and operates multiple medium capacity ships and seeking to improve its operations by augmenting its capacity. It’ll acquire three high capacity cargo vessels, which will be financed in the ratio of 3:7 by the company and banks.
The deal involves three banks (one for each ship), NSDB ltd., PBFC ltd. and SBA Ltd. with one for each ship being acquired by the firm. All banks require the ships to be insured, which can be achieved in any of the following three options:
- The shipper buys the marine insurance policy and bears the cost, repays the loan to Financier in case the ship is lost (damaged beyond repair).
- The shipper and financier insure their respective shares separately.
- The shipper gets the marine insurance and assigns the policy to the financier, at the time of claim, the shipper will receive the sum insured after the financier’s claim has been satisfied.
Such insurance will allow the financiers to recover the loan easily in case the ships are lost to the sea and not operationally fit anymore, due to a mishap. Also, the Shipping co. will not have to repay the loan after losing the operational capability, get back to business without losing steam.